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Is Novanta Inc.’s (NASDAQ:NOVT) Balance Sheet A Threat To Its Future?

Felix Olson

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Novanta Inc. (NASDAQ:NOVT), with a market cap of US$2.4b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at NOVT’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Novanta’s financial health, so you should conduct further analysis into NOVT here.

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How does NOVT’s operating cash flow stack up against its debt?

Over the past year, NOVT has maintained its debt levels at around US$256m which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$112m for investing into the business. On top of this, NOVT has generated US$90m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 35%, meaning that NOVT’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NOVT’s case, it is able to generate 0.35x cash from its debt capital.

Can NOVT pay its short-term liabilities?

With current liabilities at US$109m, the company has been able to meet these obligations given the level of current assets of US$313m, with a current ratio of 2.89x. Usually, for Electronic companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:NOVT Historical Debt January 21st 19

Does NOVT face the risk of succumbing to its debt-load?

With debt reaching 71% of equity, NOVT may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether NOVT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In NOVT’s, case, the ratio of 8.34x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving NOVT ample headroom to grow its debt facilities.

Next Steps:

NOVT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how NOVT has been performing in the past. I suggest you continue to research Novanta to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NOVT’s future growth? Take a look at our free research report of analyst consensus for NOVT’s outlook.
  2. Valuation: What is NOVT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NOVT is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.